Secondary rallies, erases losses for the week; high-quality junk bond paper in demand

By Paul A. Harris and Abigail W. Adams

Portland, Me., July 15 – While the dollar-denominated primary market passed a quiet summer Friday – and a week without any new dollar issues – the buzz on an expected megadeal backing Apollo's buyout of Tenneco, Inc. picked up as the weekend neared.

While the deal has not been launched yet, pre-marketing for as much as $3 billion in secured and unsecured notes backing Apollo's buyout of the automotive components maker began last week.

The deal is one of two LBO offerings the market is expecting with Camelot Return Merger Sub Inc.’s $600 million offering of senior secured notes (B2/B) backing the buyout of Cornerstone Building Brands, Inc. slated to price next week.

Meanwhile, the secondary space closed the week on firm footing after the “astronomical” inflation reading in June’s Consumer Price Index report and weak initial earnings reignited selling pressure over the past two sessions.

The cash bond market closed the day up ½ to ¾ point with the market erasing its losses over the past two sessions to close Friday with a weekly gain.

ETFs were buyers on Friday and lifted the broader market, a source said.

Risk assets, in general, saw a strong session on Friday as expectations for a 100 bps rate increase cooled and retail sales came in better than expected.

The secondary space is expected to remain volatile with a divergence of views in the market regarding the Federal Reserve’s rate hike schedule and a recession.

However, the amount of cash waiting to be put to work in the high-yield market has reached historic levels.

Due to calls, tenders, maturities, coupons and record low issuance, there is $93 billion in excess cash in the market, an all-time record, according to a BofA Global Research report.

There is a sentiment that the Federal Reserve’s rate hike campaign may peak at its next meeting with BB credits one of the first in line to benefit from the deployment of cash reserves.

The trend towards higher quality credit is already present in the market with BB paper outperforming.

Charter subsidiary CCO Holdings LLC’s junk bonds (B1/BB-), T-Mobile US Inc.’s 6 7/8% senior notes due 2028 and Centene Corp.’s split-rated 3% senior notes due 2030 (Ba1/BBB-) were all on the rise on Friday.

However, CCC credits continued to underperform with the market still in the process of pricing in a recession.

While the broader market rallied, Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) remained pinned near its all-time low.

LBOs on the horizon

While the dollar-denominated primary market passed a quiet summer Friday – and a week without any new dollar issues – the buzz on an expected megadeal backing Apollo's buyout of Tenneco picked up as the weekend neared.

If it's the deal that won't appear it's also the deal that won't die, sources say.

Debt financing for the buyout began being telegraphed to the market shortly after the Independence Day holiday weekend.

More than a week ago dealers began pre-marketing as much as $3 billion of bonds from Pegasus Merger Co., an affiliate of Apollo.

Early pricing conversations are as follows, according to a portfolio manager: $2 billion of unsecured notes in the context of 9% and $1 billion of unsecured notes at 250 to 300 basis points behind the secured notes.

The debt financing also includes a $2.4 billion first-lien term loan with early pricing conversations in the context of 10% equivalent, the manager said.

Given Friday's market rally, and barring the unforeseen, the Tenneco deal should roll out early in the July 18 week, the manager said.

Meanwhile the only announced deal on the calendar is the Camelot Return Merger Sub Inc. $600 million offering of six-year non-call-two senior secured notes (B2/B) backing the buyout of Cornerstone Building Brands by Clayton, Dubilier & Rice.

Initial guidance has those notes coming with an 8¾% coupon at a discount to yield 10½%.

The roadshow wraps up Tuesday, with pricing expected to follow later the same day.

BBs eyed

The high-yield market is sitting on a record amount of cash due to maturities, redemptions, coupons and tenders and few new issues to put excess money to work.

There is $93 billion on the sidelines waiting to be put to work, a record amount, according to a BofA Global Research report.

While cash is likely to remain on the sidelines until rate volatility subsides and a recession is fully priced in, higher-quality credits will be the first to benefit from the deployment of cash.

“We expect that capital is going to get deployed to high-quality bonds in a bid for their duration and quality attributes,” analysts wrote in the report. “It is only a question of time and patience, in our view.”

There has been a noticeable trend towards higher-quality credits over the past two weeks and that trend continued on Friday.

Charter subsidiary CCO Holdings’ junk bonds remained well bid with the 4½% senior notes due 2032 climbing 1½ points to close Friday at 84¾, according to a market source.

T-Mobile’s 6 7/8% senior notes due 2028 climbed 1 point to close the day wrapped around 109.

Centene’s split-rated 3% senior notes due October 2030 gained 1½ points to trade up to 85.

Carvana pinned down

While the broader market rallied on Friday, Carvana’s 10¼% senior notes due 2030 did not participate with the notes pinned down near their all-time lows.

The 10¼% notes continued to trade on a 78-handle and were wrapped around 78 7/8 heading into the market close, according to a market source.

With $17 million in reported volume, the notes were the most actively traded issue of Friday’s session.

The notes fell 4 points on the week.

Thursday outflows

The dedicated high-yield bond funds sustained $605 million of daily net outflows of cash on Thursday, according to a market source.

High-yield ETFs saw $411 million of outflows on the day.

Actively managed high-yield funds sustained $194 million of outflows on Thursday.

News of Thursday's daily flows trails a Thursday report that the combined funds sustained $652 million of net outflows in the week to the Wednesday, July 15, close, according to the market source.

Indexes

The KDP High Yield Daily index gained 29 points to close Friday at 55.29 with the yield now 7.26%.

The index fell 24 points on Thursday and 13 points on Wednesday after gaining 8 points on Tuesday and 16 points on Monday.

The index posted a cumulative gain of 16 points on the week.

The ICE BofAML US High Yield index gained 54.8 basis points with the year-to-date return now negative 12.43%.

The index fell 41.2 bps on Thursday and 11.4 bps on Wednesday after rising 9.8 bps on Tuesday and 12.1 bps on Monday.

The index posted a cumulative gain of 24.1 bps on the week.

The CDX High Yield 30 index jumped 99 bps to close Friday at 98.82.

The index sank 27 bps on Thursday, 52 bps on Wednesday, 17 bps on Tuesday and 46 bps on Monday.

The index posted a cumulative loss of 43 bps on the week.

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